Material Requirements Planning (MRP) and ERP

Material Requirements
Planning (MRP)
and ERP 14
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Eleventh Edition
Principles of Operations Management, Ninth Edition
PowerPoint slides by Jeff Heyl
© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 14 - 1
Outline
► Global Company Profile:
Wheeled Coach
► Dependent Demand
► Dependent Inventory Model
Requirements
► MRP Structure
► MRP Management
© 2014 Pearson Education, Inc. 14 - 2

Outline - Continued
► Lot-Sizing Techniques
► Extensions of MRP
► MRP In Services
► Enterprise Resource Planning (ERP)

Learning Objectives
When you complete this chapter you
should be able to:
1. Develop a product structure
2. Build a gross requirements plan
3. Build a net requirements plan
4. Determine lot sizes for lot-for-lot, EOQ,
and POQ

Learning Objectives
When you complete this chapter you
should be able to:
5. Describe MRP II
6. Describe closed-loop MRP
7. Describe ERP

Dependent Demand
For any product for which a schedule

can be established, dependent
demand techniques should be used

Dependent Demand
Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and
labor
4. Reduced inventory levels

Dependent Demand
▶ The demand for one item is related to the
demand for another item
▶ Given a quantity for the end item, the
demand for all parts and components can
be calculated
▶ In general, used whenever a schedule can
be established for an item
▶ MRP is the common technique

Dependent Inventory Model
Requirements
Effective use of dependent demand
inventory models requires the following
1. Master production schedule

2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

Master Production Schedule
(MPS)
▶ Specifies what is to be made and when
▶ Must be in accordance with the aggregate
production plan
▶ Inputs from financial plans, customer demand,
engineering, supplier performance
▶ As the process moves from planning to
execution, each step must be tested for
feasibility
▶ The MPS is the result of the production planning
process
(MPS)
▶ MPS is established in terms of specific products
▶ Schedule must be followed for a reasonable
length of time
▶ The MPS is quite often fixed or frozen in the
near term part of the plan
▶ The MPS is a rolling schedule
▶ The MPS is a statement of what is to be
produced, not a forecast of demand

The Planning Process
Figure 14.1
Production Marketing
Finance
Capacity Customer
Cash flow
Inventory demand
Supply Chain Sales & Operations

Procurement Planning Human Resources
Supplier Generates an Staff planning
performance aggregate plan
Master production
schedule
Figure 14.1
Master production
schedule
Change
master
production
schedule?
Material
requirements plan
Schedule and
execute plan
Figure 14.1
Aggregate
Production Plan Figure 14.2
Months January February

Aggregate Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100

(MPS)
Can be expressed in any of the following
terms:
1. A customer order in a job shop (make-to-

order) company
2. Modules in a repetitive (assemble-to-
order or forecast) company
3. An end item in a continuous (stock-to-
forecast) company

MPS Example
Master Production Schedule for Chef John’s Buffalo Chicken

TABLE 14.1
Mac & Cheese
GROSS REQUIREMENTS FOR CHEF JOHN’S BUFFALO MAC & CHEESE
Day 6 7 8 9 10 11 12 13 14 And so on
Quantity 450 200 350 525 235 375

Bills of Material
▶ List of components, ingredients, and
materials needed to make product
▶ Provides product structure
▶ Items above given level are called parents
▶ Items below given level are called
components or children

BOM Example
Level Product structure for “Awesome” (A)

0 A
1 B(2) C(3)
2 E(2) E(2) F(2)
3 D(2) G(1) D(2)

BOM Example
For an order of 50 Awesome speaker kits
Level Product structure for “Awesome” (A)

Part B: 2 x number of As = (2)(50) = 100
0 C:
Part 3 x number of As = A (3)(50) = 150
Part D: 2 x number of Bs
1 B(2) + 2 x number of Fs = (2)(100) + (2)(300)
C(3) = 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part
2 F: 2 x number
E(2) of Cs = (2)(150) =
E(2) F(2)300
Part G: 1 x number of Fs = (1)(300) = 300
3 D(2) G(1) D(2)

Bills of Material
▶ Modular Bills
▶ Modules are not final products but
components that can be assembled into
multiple end items
▶ Can significantly simplify planning and
scheduling

Bills of Material
▶ Planning Bills
▶ Also called “pseudo” or super bills
▶ Created to assign an artificial parent to the
BOM
▶ Used to group subassemblies to reduce the
number of items planned and scheduled
▶ Used to create standard “kits” for production

Bills of Material
▶ Phantom Bills
▶ Describe subassemblies that exist only
temporarily
▶ Are part of another assembly and never go
into inventory
▶ Low-Level Coding
▶ Item is coded at the lowest level at which it
occurs
▶ BOMs are processed one level at a time

Accurate Inventory Records
▶ Accurate inventory records are
absolutely required for MRP (or any
dependent demand system) to operate
correctly
▶ Generally MRP systems require more
than 99% accuracy

Purchase Orders Outstanding
▶ A by-product of well-managed
purchasing and inventory control
department
▶ Outstanding purchase orders must
accurately reflect quantities and
scheduled receipts

Lead Times for Components
▶ The time required to purchase,
produce, or assemble an item
▶ For production – the sum TABLE 14.2
of the move, setup, and Lead Times for Awesome
Speaker Kits (As)
assembly or run times COMPONENT LEAD TIME
▶ For purchased items – A 1 week

B 2 weeks
the time between the
C 1 week
recognition of a need D 1 week
and when its available E 2 week
for production F 3 weeks
G 2 weeks

Time-Phased Product
Structure Figure 14.3
Must have D and E
Start production of D completed here so
production can begin
on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |
1 2 3 4 5 6 7 8
Time in weeks
MRP Structure
Figure 14.4
Data Files Output Reports
MRP by
BOM Master period report
production schedule
MRP by
date report
Lead times
(Item master file) Planned order
report
Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed
Order quantity too

small or too large

Determining Gross
Requirements
▶ Starts with a production schedule for the end
item – 50 units of Item A in week 8
▶ Using the lead time for the item, determine the
week in which the order should be released –
a 1 week lead time means the order for 50
units should be released in week 7
▶ This step is often called “lead time offset” or
“time phasing”

Determining Gross
Requirements
▶ From the BOM, every Item A requires 2 Item
Bs – 100 Item Bs are required in week 7 to
satisfy the order release for Item A
▶ The lead time for the Item B is 2 weeks –
release an order for 100 units of Item B in
week 5
▶ The timing and quantity for component
requirements are determined by the order
release of the parent(s)

Determining Gross
Requirements
▶ The process continues through the entire
BOM one level at a time – often called
“explosion”
▶ By processing the BOM by level, items with
multiple parents are only processed once,
saving time and resources and reducing
confusion
▶ Low-level coding ensures that each item
appears at only one level in the BOM

Gross Requirements Plan
Gross Material Requirements Plan for 50 Awesome Speaker Kits (As)
TABLE 14.3
with Order Release Dates Also Shown
WEEK
LEAD
1 2 3 4 5 6 7 8 TIME
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300

ITEM ON HAND ITEM ON HAND
Net Requirements PlanA

B
10
15
E
F
10
5
C 20 G 0
D 10

Net Requirements Plan

Determining Net Requirements
▶ Starts with a production schedule for the end

item – 50 units of Item A in week 8
▶ Because there are 10 Item As on hand, only
40 are actually required – (net requirement) =
(gross requirement – on-hand inventory)
▶ The planned order receipt for Item A in week
8 is 40 units – 40 = 50 – 10

▶ Following the lead time offset procedure, the
planned order release for Item A is now 40 units
in week 7
▶ The gross requirement for Item B is now 80 units
in week 7
▶ There are 15 units of Item B on hand, so the net
requirement is 65 units in week 7
▶ A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in
week 5

▶ A planned order receipt of 65 units in week 7
generates a planned order release of 65 units
in week 5
▶ The on-hand inventory record for Item B is
updated to reflect the use of the 15 items in
inventory and shows no on-hand inventory in
week 8
▶ This is referred to as the Gross-to-Net
calculation and is the third basic function of the
MRP process

Gross Requirements Schedule
Figure 14.5
A S
B C B C
Master schedule
Lead time = 4 for A Lead time = 6 for S for B
Master schedule for A Master schedule for S sold directly
Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
40 50 15 40 20 30 10 10
Periods 1 2 3 4 5 6 7 8
Therefore, these are
40+10 15+30
Gross requirements: B 10 40 50 20 the gross
=50 =45
requirements for B
Net Requirements Plan
The logic of net requirements
Gross + Allocations
requirements
Total requirements
On Scheduled Net
– + = requirements
hand receipts
Available inventory

MRP Planning Sheet
Figure 14.6

Safety Stock
▶ BOMs, inventory records, purchase and
production quantities may not be perfect
▶ Consideration of safety stock may be prudent
▶ Should be minimized and ultimately
eliminated
▶ Typically built into projected on-hand
inventory

MRP Management
▶ MRP dynamics
▶ Facilitates replanning when changes occur
▶ System nervousness can result from too
many changes
▶ Time fences put limits on replanning
▶ Pegging links each item to its parent
allowing effective analysis of changes

MRP Management
▶ MRP limitations
▶ MRP does not do detailed scheduling–it
plans
▶ Works best in product-focused, repetitive
environments
▶ Requires fixed lead time and infinite size
time buckets

Lot-Sizing Techniques
▶ Lot-for-lot techniques order just what is
required for production based on net
requirements
▶ May not always be feasible
▶ If setup costs are high, lot-for-lot can be
expensive
▶ Economic order quantity (EOQ)
▶ EOQ expects a known constant demand and
MRP systems often deal with unknown and
variable demand

▶ Periodic order quantity (POQ) orders
quantity needed for a predetermined time
period
▶ Interval = EOQ / average demand per period
▶ Order quantity set to cover the interval
▶ Order quantity calculated when order is
released
▶ No extra inventory

▶ Dynamic lot sizing techniques
▶ Balance lot size and setup costs
▶ Part period balancing (least total cost)
▶ Least unit cost
▶ Least period cost (Silver-Meal)
▶ Dynamic programming approach
▶ Wagner-Whitin

Lot-for-Lot Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example
No on-hand inventory is carried through the system
TotalWEEK
holding cost1 = $0
2 3 4 5 6 7 8 9 10
Gross
There are seven35setups for this
30 40 0 item
10 in this
40 30 plan
0 30 55
requirements
Total ordering cost = 7 x $100 = $700
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example
Annual demand D = 1,404
Holding cost = 3751 units
WEEK 2
x3$1 (including
4 5 6
577 units
8
on9 10
hand at end of week 10)
Gross
Ordering 35 30 40 0 10 40 30 0 30 55
requirements cost = 4 x $100 = $400
Total cost = $375 + $400 = $775
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Average weekly gross requirements = 27; EOQ = 73 units
POQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 40 0 0 70 30 0 0 55
hand
Net
0 30 0 0 10 0 0 55 0
requirements
Planned order
70 80 0 85 0
receipts
Planned order
70 80 85
releases
EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks
POQ Lot Size Example
Setups = 3 x $100 = $300
WEEK 1 2 3 4 5 6 7 8 9 10
Holding cost = (40 + 70 + 30 + 55) units x $1 = $195
Gross
Total cost = $30035+ $195
requirements
30 = $495
40 0 10 40 30 0 30 55
Scheduled
receipts
Projected on
35 35 0 40 0 0 70 30 0 0 55
hand
Net
0 30 0 0 10 0 0 55 0
requirements
Planned order
70 80 0 85 0
receipts
Planned order
70 80 85
releases
EOQ = 73 units; Average weekly gross requirements = 27;

POQ interval = 73/27 ≅ 3 weeks
Lot-Sizing Summary
For these three examples
COSTS
SETUP HOLDING TOTAL
Lot-for-lot $700 $0 $700
EOQ $400 $375 $775
POQ $300 $195 $495

Lot-Sizing Summary
▶ In theory, lot sizes should be recomputed
whenever there is a lot size or order
quantity change
▶ In practice, this results in system
nervousness and
instability
▶ Lot-for-lot should
be used when
low-cost setups can
be achieved
Lot-Sizing Summary
▶ Lot sizes can be modified to allow for scrap,
process constraints, and purchase lots
▶ Use lot-sizing with care as it can cause
considerable distortion of requirements at lower
levels of the BOM
▶ When setup costs are significant and demand is
reasonably smooth, POQ or EOQ should give
reasonable results

Extensions of MRP
▶ MRP II
▶ Closed-Loop MRP
▶ Capacity Planning

Material Requirements
Planning II
▶ Requirement data can be
enriched by other resources
▶ Generally called MRP II or
Material Resource Planning
▶ Outputs can include scrap,
packaging waste, effluent,
carbon emissions
▶ Data used by purchasing, production
scheduling, capacity planning, inventory,
warehouse management
Material Resource Planning
TABLE 14.4 Material Resource Planning (MRP II)
Weeks
LT 5 6 7 8
Computer 1 100
Labor Hrs: .2 each 20
Machine Hrs: .2 each 20
Scrap: 1 ounce fiberglass each 6.25 lb
Payables: $0 each $0
PC Board (1 each) 2 100
Scrap: .5 ounces copper each 3.125 lb
Payables: raw material at $5 each $500
Processors (5 each) 4 500
Scrap: .01 ounces of acid waste each 0.3125 lb
Payables: processors at $10 each $5,000

Closed-Loop MRP System
Figure 14.7
Aggregate Plan
OK?
NO Priority Management Capacity Management
Develop Master Production Evaluate Resource Availability

Schedule (Rough Cut)
OK?
NO OK? YES Planning
Prepare Materials Determine Capacity Availability
Requirements Pan
OK? YES
Execution
Detailed Production Implement Input/Output Control (in repetitive
Activity Control systems JIT
(Shop Scheduling/Dispatching) techniques
are used)

Capacity Planning
▶ Feedback from the MRP system
▶ Load reports show resource
requirements for work centers
▶ Work can be moved between work
centers to smooth the load or bring it
within capacity

Smoothing Tactics
1. Overlapping
► Sends part of the work to following operations
before the entire lot is complete
► Reduces lead time
2. Operations splitting
► Sends the lot to two different machines for the same
operation
► Shorter throughput time but increased setup costs
3. Order or lot splitting
► Breaking up the order into smaller lots and running
part earlier (or later) in the schedule
Order Splitting
▶ Develop a capacity plan for a work cell at
Wiz Products
▶ There are 12 hours available each day
▶ Each order requires 1 hour
Day 1 2 3 4 5
Orders 10 14 13 10 14

Order Splitting
UTILIZATION:
CAPACITY CAPACITY OVER/ PRODUCTION NEW
UNITS REQUIRED AVAILABLE (UNDER) PLANNER’S PRODUCTION
DAY ORDERED (HOURS) (HOURS) (HOURS) ACTION SCHEDULE
1 10 10 12 (2) 12
2 14 14 12 2 Split order: 12
move 2 units to
day 1
3 13 13 12 1 Split order: 13
move one unit
to day 6 or
request
overtime
4 10 10 12 (2) 12
5 14 14 12 2 Split order: 12
move 2 units to
day 4
61

Order Splitting
Figure 14.8
2 orders moved to day 1 from day
Capacity exceeded 2 (a day early)
on days 2, 3, and 5 Available 1 order forced to overtime
capacity or to day 6
2 orders moved to
day 4 (a day early)
14 – 14 –
Standard labor-Hours
Standard labor-Hours
12 – 12 –
10 – 10 –
8– 8–
6– 6–
4– 4–
2– 2–
0– 0–
1 2 3 4 5 1 2 3 4 5
Days Days
(a) (b)

MRP in Services
▶ Some services or service items are
directly linked to demand for other
services
▶ These can be treated as dependent
demand services or items
▶ Restaurants
▶ Hospitals
▶ Hotels

MRP in Services
(a) PRODUCT STRUCTURE TREE Figure 14.9
Buffalo Chicken Mac & Cheese
Garnish with Buffalo Chicken Baked Buffalo Chicken Mac

mix, Blue Cheese, Scallions & Cheese
Unbaked Buffalo Chicken

Mac & Cheese
Buffalo Chicken Mix
Grated
Smoked Blue Cooked Mac &
Buffalo Pepper Chopped
Pulled Cheese Elbow Cheese Milk
Sauce Jack Scallions
Chicken Crumbles Macaroni Base
Cheese

MRP in Services
(b) BILL OF MATERIALS
Production Specifications Buffalo Chicken Mac & Cheese (6 portions)

Unit Total Labor
Ingredients Quantity Measure Cost Cost Hrs.
Elbow Macaroni (large, uncooked) 20.00 oz. $ 0.09 $ 1.80
Cheese-Pepper Jack (grated) 10.00 oz. 0.17 1.70
Mac and Cheese Base (from 32.00 oz. 0.80 25.60
refrigerator)
Milk 4.00 oz. 0.03 0.12
Smoked Pulled Chicken 2.00 lb. 2.90 5.80
Buffalo Sauce 8.00 oz. 0.09 0.72
Blue Cheese Crumbles 4.00 oz. 0.19 0.76
Scallions 2.00 oz. 0.18 0.36
0.2 hrs

Distribution Resource Planning
(DRP)
Using dependent demand techniques
through the supply chain
► Expected demand or sales forecasts

become gross requirements
► All other levels are computed
► DRP pulls inventory through the system
► Small and frequent replenishments

Enterprise Resource Planning
(ERP)
▶ An extension of the MRP system to tie in
customers and suppliers
1. Allows automation and integration of many
business processes
2. Shares common data bases and business
practices
3. Produces information in real time
▶ Coordinates business from supplier
evaluation to customer invoicing
(ERP)
▶ ERP modules include
▶ Basic MRP
▶ Finance
▶ Human resources
▶ Supply chain management (SCM)
▶ Customer relationship management (CRM)
▶ Sustainability

Figure 14.10 ERP and MRP

Customer Relationship Management
Sales Order Shipping

(order entry, Distributors,
Invoicing product configuration, retailers,
sales management) and end users

Master
Production
Schedule
Inventory Bills of
Management Material
MRP
Work
Orders
Purchasing Routings
and and
Lead Times Lead Times
Table 13.6

Supply-Chain Management
Vendor Communication
(schedules, EDI, advanced shipping notice,
e-commerce, etc.)

Figure 14.10
Finance/
ERP and MRP
Accounting
Accounts
Receivable
General
Ledger
Accounts
Payable
Payroll
Table 13.6

(ERP)
▶ ERP systems have the potential to
▶ Reduce transaction costs
▶ Increase the speed and accuracy of
information
▶ Facilitates a strategic emphasis on JIT
systems and supply chain integration
▶ Can be expensive and time-consuming
to install

SAP’s ERP Modules
© 2014 Pearson Education, Inc. Figure 14.11 14 - 77

ERP in the Service Sector
▶ ERP systems have been developed for
health care, government, retail stores,
hotels, and financial services
▶ Also called efficient consumer response
(ECR) systems
▶ Objective is to tie sales to buying,
inventory, logistics, and production

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Material Requirements

PowerPoint slides by Jeff Heyl

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For any product for which a schedule

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1. Master production schedule

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Supply Chain Sales & Operations

Months January February

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1. A customer order in a job shop (make-to-

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Master Production Schedule for Chef John’s Buffalo Chicken

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Level Product structure for “Awesome” (A)

2 E(2) E(2) F(2)

3 D(2) G(1) D(2)

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Level Product structure for “Awesome” (A)

3 D(2) G(1) D(2)

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▶ For purchased items – A 1 week

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Data Files Output Reports

Order quantity too

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Net Requirements PlanA

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▶ Starts with a production schedule for the end

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Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

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